A standard principle-agent problem in corporate governance is managers who prefer to hoard cash instead of returning profits to investors, with the investors not trusting the managers to use that cash in their interests (instead of the managers’ own interests) in the future. (That’s probably why the shares of such a company are trading at such a low multiple to its earnings that you can afford to buy them by issuing debt.) Leveraged buyout can be viewed as a solution to this problem.
I understand this argument, it would be a perfectly logical reason for some leveraged buyouts to happen in some circumstances, but in practice many leveraged buyouts are a way to offload risk onto counterparties with less legible high-trust relationships with management, such as employees—e.g. in the airline bankruptcies—or consumers, who can’t use brandquality as much as they used to be able to because corporate decisions are made based on short-term numbers, and turnover means that the cost of eroded brand loyalty will be correlated across many companies and distributed across many people, and since the state won’t let large corporations in general fail all at once, we end up with bailouts. I recommended a book on the subject because I really can’t cover everything in the blog post, it’s long enough already and this sort of thing is very well documented elsewhere.
I understand this argument, it would be a perfectly logical reason for some leveraged buyouts to happen in some circumstances, but in practice many leveraged buyouts are a way to offload risk onto counterparties with less legible high-trust relationships with management, such as employees—e.g. in the airline bankruptcies—or consumers, who can’t use brand quality as much as they used to be able to because corporate decisions are made based on short-term numbers, and turnover means that the cost of eroded brand loyalty will be correlated across many companies and distributed across many people, and since the state won’t let large corporations in general fail all at once, we end up with bailouts. I recommended a book on the subject because I really can’t cover everything in the blog post, it’s long enough already and this sort of thing is very well documented elsewhere.